Biz Brain: Better to inherit or share title to spouse's classic car

Q. My husband and I are residents of New Jersey. It is my understanding that I would inherit all his assets should he predecease me. We both have wills naming each other as beneficiary. My husband has a classic car that is titled in his name only. He paid $40,000, invested $10,000 in restoration and it’s now worth $100,000. We were thinking about adding my name to the title, but is that a bad idea from a capital gains tax standpoint?
— Classic couple
A. Bravo for thinking ahead. There are different tax implications under the two scenarios.
First, a note on your comment that a surviving spouse would inherit all his or her spouse’s assets if there were no will. This is not the case in every situation, said Mary Scrupski, a Robbinsville-based estate planning attorney.
“The surviving spouse inherits everything if the deceased spouse has no surviving children or parents, or all of the surviving children are also children of the deceased spouse and surviving spouse,” she said. “If the spouse who dies has children from another marriage, then those children would also inherit a portion of the assets. This is only the case if there is no will.”
With respect to the car, the cost basis is what matters here.
When certain property, such as your classic car, is sold, the tax code imposes a tax on the capital gain, said Frederick Schoenbrodt, an estate planning attorney with Neff Aguilar in Red Bank. Essentially, the amount of capital gain equals the difference between the sale price and the seller’s basis — typically the seller’s cost to acquire the property plus the costs of any improvements. A higher basis results in less taxable gain and a lower tax bill.
So the question for you: What is your basis if you receive property by gift or inheritance?
If you inherited the car, your basis in the car would be its fair market value at the date of his death. If you sold it right after his death, you would probably have no taxable gain on the sale, Schoenbrodt said. If you became a co-owner during his lifetime, you’d end up with a blended basis after his death.
“His half of the property would step up to one half of the date of death value of $100,000, or $50,000, while your half would equal one-half of his original transferred basis of $50,000, or $25,000,” he said. “Together, your blended basis in the car would thus be $75,000. If you sold it for $100,000, you would have a $25,000 capital gain to report.”
Schoenbrodt said the result would be different if you die before your husband. Under those circumstances, if he gave you a one-half interest during your life, and then he sold the car during his life but after your death, there would be a better tax result because your half of the basis would step up to the value on your date of death.
“He dies first, better for you to inherit,” he said. “You die first, better for him to have given you half.”
—Karin Price Mueller
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